Effects of GAAP Changes

We had standing room only in Austin Texas for the Financial Intelligence Program. We had a great day of finance and surprisingly enough it was a perfect finance day. The class was loaded with creative directors and developer types. It’s fun to teach finance to creative types because they relate to my discussion on accounting and finance as an art. At EA classes we always have a lot of discussion around GAAP (Generally Accepted Accounting Principles) and non-GAAP financials. EA uses Non-GAAP extensively in their external reporting to Wall Street. EA non-GAAP excludes deferred revenue and stock based compensation along with the typical one time charges.

Deferred revenue is a big issue at EA. It turns out that in 2008 a game like Madden added internet play with other players and a connection to the NFL. If a player is traded or injured the teams are adjusted based on actual injury reports in the internet mode. These features are really cool features. Believe me I know my sons love the internet play and real time league adjustments. In 2008 the GAAP code was modified to cover revenue recognition for packaged games (like EA Sports Madden or FIFA Soccer) that provide internet play to customers. The Financial Accounting Standards Board (FASB), that reviews and develop the GAAP code, decided that since EA now provides internet connection to their customers, EA must spread or defer the game revenue over the entire 9 months the league is playing. This made EA’s revenue look really low in the fall quarter of 2009 because all the FIFA and Madden revenue that used to be counted when it was shipped now had to be deferred over the next 6 to 9 months. So for a non-GAAP EA income statement the deferred revenue rule was not followed to make it possible to compare revenue by quarter more consistently.

It was fun to be in class with my Texas friends. Austin it turns out is home to the University of Texas. Everyone there are big Texas football fans. It turns out my team BYU beat Texas 40 – 21. So it was fun to talk football with the class. At least fun for me. 🙂

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